Euro Holds Range, British Pound Weakens on Speculation for Further Easing

Talking Points
•    Japanese Yen: Bank of Japan to Maintain Accommodative Policy
•    Pound: House Prices Increase, Manufacturing Expands in October
•    Euro: ECB Holds Cautious Tone Ahead of Rate Decision
•    US Dollar: ISM Manufacturing, Pending Home Sales on Tap

Euro Holds Range, British Pound Weakens on Speculation for Further Easing

The British pound weakened against the greenback on Monday and slipped to a low of 1.6345 as market participants anticipate the Bank of England to expand its asset purchase program this week, and speculation for further easing may lead the GBP/USD to retrace the advance from the previous month as investors weigh the outlook for future policy. At the same time, the Chancellor of the Exchequer, Alistair Darling, held an improved outlook for the U.K. banking sector and said that the Royal Bank of Scotland and Lloyds Banking Group will go through “a substantial divestment” in order to increase competition and to strengthen the financial system.

Meanwhile, the economic docket showed manufacturing activity in the U.K. unexpectedly expanded in October, with the index rising to 53.7 from a revised reading of 49.9 in previous month, and conditions are likely to improve throughout the second-half of the year as policy makers see the nation emerging from the worst recession since the post-war period. Moreover, the Hometrack housing price survey increased 0.2% for the same period, with the annualized reading slipping 4.2% from the previous year after tumbling 5.6% in September, and the housing market should continue to normalize over the coming months as the government takes unprecedented steps to stimulate the ailing economy. Nevertheless, ex- BoE board member David Blanchflower argued that the central bank will “have to do more quantitative easing” and said that the government should “keep stimulating the economy” in an effort to foster a sustainable recovery. After failing to emerge from the recession in the third-quarter, market participants project the MPC to ease policy further on Thursday as the recovery remains weak, and the British pound may hold a broad range over the next two-days of trading as market participants weigh the outlook for future policy.

The Euro tipped higher against the greenback but failed to cross back above the 20-Day SMA at 1.4853, and the single-currency may continue to hold a narrow range ahead of the European Central Bank interest rate decision on Thursday as investors anticipate the Governing Council to hold a neutral policy stance going into the following year. Meanwhile, ECB board member Christian Noyer held a cautious outlook for the region and said that “problems are stemming from the weakening of the dollar and the pound,” and stated “excess volatility and disorderly exchange-rates have adverse implications” for the economic recovery as the global financial systems remains weak. Nevertheless, the final manufacturing PMI reading for the Euro-Zone showed outputs increased for the first time since May 2008, with the index rising to 50.7 from 49.3 in the previous month, while the reading for Germany slipped to 51.0 from an initial forecast of 51.1 in the previous month.

The greenback was mixed across the board throughout the overnight session and the reserve currency may face increased volatility over the next 48 hours of trading as the Federal Reserve is schedule to set monetary policy on Wednesday at 19:15 GMT. Nevertheless, manufacturing activity in the U.S. is expected to expand for the third consecutive month in October, with economists forecasting the ISM index to increase to 53.0 from 52.6 the previous month, and the data is likely to move the currency market as traders evaluate the prospects for a sustainable recovery. At the same time, pending home sales are expected to hold flat in September, while construction spending is anticipated to fall 0.2% from August, and the slump in the housing market could drag on the outlook for future growth as banks continue to tighten credit standards for households and businesses.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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